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Offshore Writer Explains How To Get US Foreign Earned Income Exclusion

by Mike Godfrey, Tax-News.com, New York

19 April 2001


US citizens living abroad don't get much exemption from US taxes, but they can get some tax relief under Section §911 of the Internal Revenue Code. This is, in fact, one long-standing loophole Americans have used for years to offset their tax load, and it's better known as the "Foreign Earned Income Exclusion". Well-known offshore author Tom Azzara explains below how to take advantage of it.

'Under US tax law (i.e. Section §911 of the Internal Revenue Code) an American taxpayer and his wife can exclude up to $76,000 each from their salary ($152,000 = total), provided they live offshore at least 330 days of every year. This is called the "Foreign Earned Income Exclusion", and it is part of the Statutory Internal Revenue "tax" Code. This exclusion is an annual tax allowance under US tax law, but you have to live outside the US at least 330 days to qualify for it.

'The amount one can exclude increases to $78,000 for the fiscal year 2001, and to $80,000 for fiscal year 2002.'

Tom quotes the IRS, saying. 'Here's what my IRS 2,000 (1040) Booklet says on page 15 (Chapter 4): Source of Earned Income:

"The source of the earned income is the place where you perform the services for which you receive the income. Foreign earned income is income you receive for performing personal services in a foreign country. Where or how you are paid has no effect on the source of the income. For example, income you receive for work done in France is income from foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City." - IRS (author)

Tom continues: 'For Example: Anguilla real estate broker company X received $1,000,000 in annual real estate sales commissions in 2002. John and Joan Dakota (living for instance in Nassau, Bahamas) are the owners of the real estate brokerage company X, which has no offices inside the US.

'John and Joan Dakota (again - living in Nassau, Bahamas) can receive up to $160,000 in salary (tax free) for fiscal year 2002 from the offshore Anguilla International Business Company, as the company's employees, and they would only need to file IRS Form 2555 with their 1040 annual tax return.

'This "exclusion" can be taken annually; but if they don't file Form 2555 with their IRS Form 1040, they don't get the EXCLUSION!

It should be noted that passive income (i.e., brokerage income - capital gains - interest - dividends, royalties) does not count as "Foreign Earned Income" under Code/Section §911.

Moreover, the American taxpayer(s) would need to include these categories (i.e., the Subpart F incomes) of income on their tax return, based on their pro-rata share of the Anguilla company's total subpart F income.

BUT NOTE.. If the Anguilla IBC has no "Subpart F income" (also called Foreign Personal Holding Company Income), the US shareholders in that Anguilla company would not have any US income tax liability on any of the offshore profits that the offshore company accrues.

About the Author:

Tom Azzara lives and works in sunny, tax free Nassau, in the Bahamas. In the last 10 years, Tom has incorporated over 1,080 International Business Companies there in Nassau.

In January, 2001, he became an "Overseas Agent" for the Anguilla Government Registrar of Companies, and as such, has a signed "official" Agreement with them. He also has the same agreement with a barrister in Anguilla - also working directly with the Anguilla Government. Beginning in 2001, the Tom began forming IBCs out of this Crown Colony/Territory and no-tax haven of Anguilla - 150 miles east of Puerto Rico.

Tom Azzara has formed over 110 Anguilla IBCs since January 3, 2001, and consults with his clients on the "do's and don'ts" when going offshore.

Tom goes on to say that out of a total of over 400 IBC's (in-house) that were mostly Bahamian in origin, most are moving to Anguilla, or other jurisdictions, because they feel other jurisdictions now have more to offer, including more streamlined legislation - when compared to the "New" over-regulated Bahamas IBC Act 2000.

For banking contacts, Tom's clients use highly respectable institutions in the Isle of Man, Nevis, Anguilla and Bermuda.

Tom publishes the "Tax Haven Reporter" and "Tax Havens of the World" and can be contacted at

Tom Azzara
New Providence Estate Planners, Ltd.
(Lawyers and Consultants)
54 Sandyport Drive
P.O. Box CB 11552
Nassau, Bahamas
Fax/phone: (242) 327-7359
email: taxman@batelnet.bs

website: http://www.bahamasbahamas.com

For more information about Anguilla, see lowtax.net at http://www.lowtax.net/lowtax/html/jaghom.html

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